TAPER-gate: The biggest news of the last week, and possibly the biggest economic news of the year, was the Fed’s decision not to scale back the rate of Quantitative Easing (Money-Printing, QE). The expectation was that they would lower it from $85 billion a month to $75 billion based on comments from Chairman Ben Bernanke back in May. Over the ensuing four months, interest rates have risen over one percent and stock markets have been on a roller-coaster ride as investors have attempted to read the tea leaves. However, only a very microscopic minority guessed that there would be no Tapering of QE. A lot of this reflects on the failure Fed’s communication policy. (Ironically, it is the presumptive nominee for the next Chairman, Janet Yellen, who is in charge of the Fed’s current communication policy!)

After TAPER-gate: Well, what now? The question of when the Fed will Taper will not be going away. Already, economists are handicapping the possibility of a Taper at the end of October or the middle of December. There are a few factors that strategists are looking at. First, will the U.S. unemployment rate fall enough? Ben Bernanke has kicked around a couple of figures about which he has hinted as being important to him (primarily 6.5% & 7.0% compared to the current rate of 7.2%). However, he has trouble with respect to abiding by the lines that he has drawn in the sand.

There is also the issue of a number of fiscal showdowns in the U.S. Congress. One is the Debt Ceiling debate. To a casual observer, this might appear to be a brawl over what looks like a mere procedural issue. However, about 70% of U.S. Federal spending is “automatic” and is not reviewed as long as the Debt Ceiling continues to rise every year. So, the Debt Ceiling debate is actually the main Federal Budget debate in the U.S.. Budgets are extremely important with respect to the health of the economy, so it would be irresponsible to downgrade the Debt Ceiling debate to a “Partisan Squabble.”

Secondly, there will be a lot of debate over the funding of Obamacare. Somehow, during the legislation of Obamacare, the narrative seemed to be that there would be no major additional cost, just a realignment as to how costs would be charged and administered. However, fees and taxes will have to go up to pay for it. That is going to consolidate a lot of political opposition. Obamacare sounds good when talking about the benefits. But, when voters begin to confront the costs, they get mad. And their political representatives hear about it.

Some are beginning to speculate that there may be a proposal where the funding of Obamacare is scaled back in exchange for agreeing to raise the Debt Ceiling. President Obama wants it all. But, will he be willing to compromise? If not, we could get a shutdown of the U.S. Federal government on October 17th (down to essential services only) which would hit the economy. In light of that, the Fed may not want to Taper at all until we are past these political showdowns regardless of how low the unemployment rate may fall in the interim.

While news of the political wrangling will keep the equity markets anchored, the incredible tailwind provided by continued QE may make this September-October stretch look a lot more tame than it has traditionally.

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